Barriers to entry for the third telecom

Corporate Watch

By Amelia H. C. Ylagan

Mobile phone subscriptions have reportedly reached 119 million when the total population is at 101 million, meaning a 117% penetration rate (many people have more than one SIM number) pushed by the growth rate of 1.5x (or 30 million users) every year (internetworldstats.com). The median age for Filipinos is 24 (pcw.gov.ph/statistics), and around this age are the millennials who grew up as digital natives, the most avid and active users of mobile phones and the Internet.

Is the reputed “duopoly” of PLDT/Smart Communications and Globe Telecom taking advantage of how necessary the cell phone has become at this time? Demand is tending toward inelasticity, so that pricing is set high by these only-two suppliers, some critics say. Early in his term, President Rodrigo Duterte warned the “duopoly” that if they didn’t improve their services (and their pricing), he would bring in competitors from China (Rigoberto Tiglao, The Manila Times, Oct. 10, 2016).

Globe President and CEO Ernest Cu denied that there is a duopoly, saying “that only happens when two industry players are comfortable with each other. Globe and PLDT are at each other’s throats constantly. We compete with each other fiercely, both in terms of price, in terms of features and in terms of products as well (CNN Philippines, May 31, 2016).”

Refuting an Inquirer columnist who said that the Philippines had “the slowest Internet speed in the world,” Globe cited a “State of the Internet Report” by Akamai. In the said report, the country registered an average speed of 5.5 Mbps for fixed line Internet and 8.7 Mbps for mobile Internet (Philippine Daily Inquirer, Aug. 14, 2017). Certainly not the fastest but not the slowest, either.

In May 2016, PLDT and Globe each took a 50% stake of San Miguel Corp.’s (SMC) telco assets, “the much-coveted 700-megahertz spectrum frequency,” which is seen by the industry as the key to much faster mobile Internet (CNN Philippines, June 16, 2016).

SMC had initially wanted to use the frequency, partnering with Australian carrier Telstra Corp., Ltd. for around $1 billion, but negotiations fell through. In a statement, SMC said it decided to sell its assets because the legal and commercial risks in the investment were far too large to take on alone. “The deal (selling to Globe and Smart) seems the most beneficial for consumers, since Globe and PLDT would be able to maximize the assets much faster,” SMC declared (CNN Philippines, May 31, 2016).

SMC admitted to the barriers to entry for a third telco in the Philippines: foremost, the formidable cost of investment and operations. Indeed, there are economies of scale that PLDT/Smart and Globe already enjoy, and will continue to enjoy, from their early staggered investments as they grew with the mobile telephone industry since the 1990s.

Piltel, established by the Philippine Long Distance Company (PLDT), provided the first cellular mobile phone service in the country in 1991. It operated under the Mobiline brand using analog technology (piltel.com.ph).

Islacom introduced the first digital mobile communication service in the Philippines using GSM in 1994. Globe joined the industry that same year and pioneered in prepaid and SMS services. Islacom and Globe initially agreed to operate together until Globe acquired Islacom 100% in 2001 (totel.com.au/philippines).

That smaller telcos that attempted to get into the market were eventually taken over by Smart and Globe seems to run parallel to the experience of other countries in the natural tendency for mergers and acquisitions for the needed “bigness” in resources to avail of these economies of scale for an enterprise as ambitious as a telco.

This is further exacerbated by the fast development and major changes in the technology of the industry, which have caused “bundled services” (such as phone/Internet/cable), and the constant pressure for telcos to always offer new, improved user-friendly products that incur product development costs and huge additional investments.

“Globe and PLDT already reinvest about 30% of their revenues to build their networks — well above the world average of 20%,” Sean Gowran, country manager of Ericsson Philippines and Pacific Islands said (CNN Philippines, July 12, 2016).

And thus grow monopolies and duopolies. “Telephony was a ‘natural monopoly,’ and it was in the national interest if served by just one company,” Ajit Ranade, chief economist at Aditya Birla Group said as he analyzed the strong hold of American Telephone and Telegraph Company (AT&T) for almost 100 years in the US. “AT&T’s long-lived monopoly status is quite remarkable in a country that prides itself on the intensity of antitrust scrutiny,” he said (livemint.com/Opinion, Sept. 7, 2016).

The emergence of the Internet, the mobile phone, and cable plus satellite television and the other new technologies somewhat disrupted the AT&T monopoly — but observing the growth and direction of telcos after 1984 — it would seem that the natural tendency is again for the industry to morph into a monopoly, or a duopoly with the market capture insinuated. Today, the two largest US wireless providers are Verizon Wireless with 149 million subscribers and AT&T Mobility with 138.8 million both as of Q3 2017 (fiercewireless.com, Nov. 10, 2017).

“The economics of telecommunication is a complex subject. Suffice to say that there is still a gentle tussle between the monopolistic and competitive nature of telephony,” Ranade concluded (op. cit.).

So, leave the fight for market shares between Smart and Globe, and let market forces resolve up to how much the “duopoly” can stretch pricing — to the benefit of the end-users, the people. And toward the government’s development objectives for science and for economics, the government should be objective, and not focus on opportunistic business that presently fill up the lack and needs of the people. Perhaps it is not time to force a third entrant into the industry now — let that happen when the competitive environment will allow, under recognized financial constraints.

The government should henceforth impose stricter regulation and monitoring of existing antitrust and constitutional foreign ownership limitations, where loopholes and lack of implementation allowed mergers and acquisitions that grew giant businesses, not only in telecommunications, but more glaringly in banking, retailing, construction, and other industries with broad social impact. Perhaps the Antitrust laws and the Competition Act should be amended and improved.

And for the telecoms third player — “Bring in China” — what is the present political governance saying here? Is this a subliminal suggestion to amend the Constitution to allow foreign ownership of strategic utility companies?

Amelia H. C. Ylagan is a Doctor of Business Administration from the University of the Philippines.